In the United States, almost everyone who is employed or self-employed pays into the Social Security system, the public retirement system. We do that in anticipation of receiving benefits after retirement. In fact, you can get an estimate from the government as to how much those benefits are likely to be here.
Points of interest about the Social Security system
- It currently provides just 38-40% of pre-retirement income, on average, for those people who receive benefits
- But 66 percent of Americans age 65 and over received the majority of their income from Social Security.
- The average benefit is about $1,404 per month, and most recipients receive between $700 and $1800 per month. The maximum benefit is currently $3,698 per month. That maximum would apply to someone who delayed taking benefits until age 70, and had earned the maximum taxable earnings for 35 years or more.1
- 35 years ago, the maximum taxable earnings was $35,700. In 2018, it is $128,400.
- Social Security and Medicare together accounted for 42 percent of Federal program expenditures in fiscal year 2016, by far the largest part of the federal budget.
- Benefits are paid out of trust funds set up for that purpose.
- Those trust funds are funded by payroll tax receipts; income tax on some of the benefits (Social Security benefits can be partially taxable); and interest on trust fund assets.
- The trust funds do not contain any actual cash. The trust fund is an accounting construct only – the trust funds’ assets consist of special non-tradable Treasury bonds. In fact, the annual social security surplus has always been transferred to the General fund and spent on other government programs.
- Until 2010, payroll taxes paid into the trust funds substantially exceeded benefits paid out, as the working population increased faster than the retired population in the post-WWII period and later. This excess was lent each year to the General Fund in exchange for special Treasury bonds, as described above.
- Since 2010, as the large Baby Boomer generation began to retire faster than they were replaced by new workers, the social security program has taken in less than the benefits paid out. The trust funds’ notional balances have still grown marginally due to interest income on the trust assets.
- When combined revenues fall short of the amount needed for current benefit payments, the system will dip into the trust fund to cover the shortfall. In fact, since the trust fund contains no actual assets, that shortfall must be made up out of other current government revenues – taxes must be raised or the deficit increased, even to maintain the fiction of the trust funds.
- Even if there were actual assets in the trust fund, the government now estimates that the balances in the trust funds will be depleted by 2034 – 16 years from now.
When the trust funds are used up, the result will not be an immediate end to benefit payments. Instead, at that point, absent any other changes, benefits would have to be cut to the level that could be paid out of system revenues at that time. This is now estimated to be 79% of currently promised levels.
It is not likely that nothing will change in the interim and that recipients will get a sudden 21% cut in benefit payments in 2034. Rather, some combination of benefit cuts and tax increases (entitlement reform) is likely to happen in coming years – now made even more urgent by a ballooning federal deficit. What shape this reform will take is impossible to say.
Social Security has traditionally been considered the third rail of politics – touch it and die, since retired people are a huge voting bloc.
Now however, the millennial generation has exceeded the size of the baby boomer generation for the first time. This could make it easier to get entitlement reform done, since the millennials are now on the paying end, and the time when they will be on the receiving end seems far away. As politicians begin to court this deep new pool of voters, things could change rapidly.
As you make your plans for retirement, keep in mind that although Social Security is probably here to stay, it is going to a) cost you more than you may expect in your working years in terms of higher taxes, and b) pay you less than current rates would indicate when you do retire.
This makes it even more crucial than ever that you provide separately for your own retirement. One important tool to help with that can be found here.
This retirement calculator can help you see, based on your particular situation, what kind of retirement savings contributions you need to make now and what rate of return to target on your retirement savings.
This is the first step in making sure that even in the new world of reduced government benefits, your retirement will be secure. Once your savings and investment targets are established, the next steps are to know what your investment choices are, and to select and manage these assets optimally. For more information about that, talk to your local OTA center about our Proactive Investor program.